Smart.Happy.Money 21: Giving a gift that can change your child'
Merry Christmas! I know, it’s still November but the spirit is definitely in the air, and if you haven’t already, I’m sure you are starting to think about buying gifts for all of those who you love.
Do you have kids, grandchildren, nephews, nieces, godchildren or any other child in your life that you care about? In today’s blog I am going to discuss how you can change a child’s life by giving them the gift of a secure financial future.
This doesn’t have to be a Christmas gift by the way, in fact I would encourage you to begin this as soon as a child is born. However, if you are stuck for gift ideas, this is a good option. You just have to convince a 4-year-old that a gift that they can’t see or play with is really the coolest thing ever.
Have you ever heard the saying that it’s time in the market not timing the market? Trying to pick the best time to buy and sell investments can be very hard as markets are hard to predict. What we do know is that over time investment markets have always performed well. The best way to mitigate the risks of investing are to diversify and to hold your investments for as long as possible. Being that your new born child is 0 years of age, they have a very long investment time-frame.
Let’s take the example of new parents who have just had a little baby girl, let’s call her Adele. Little Adele is busy adjusting to life outside the womb, she needs food, warmth and love which she gets from her happy new parents. Little does she know that her parents have also just taken $100 and put it into a savings account for her future. The next month they do the same and continue this for the first year of her life.
On her first birthday, Adele is discovering the pleasures of chocolate cake and is way more interested in the wrapping of Grandmas present than the toy inside. Her awesome parents now take the $1,200 they have saved and invest it in her behalf into a low-cost index fund that buys shares across thousands of companies in Australia and around the world. They set up an automatic $100 per month direct debit to add to this investment and don’t think about it again for the next 20 years. For the purpose of this exercise we are going to assume an average return of 8% pa across the 20-year investment period.
Fast forward to Adele’s 21st birthday. She has grown up, in her last year of university studying Microbiology and is having a family birthday dinner. She is having a party, but mum and dad thought that would be a bit loud for Grandma and Grandpa to attend.
Being a well-rounded young adult who has shown responsibility with her time and money, her parents decide that it is time to give her control over the investment they have been building for her.
Over the past 21 years, they have saved/invested $25,200 on her behalf, how much are they handing to their daughter?
Well, before I get to that. Let me explain what they have done.
Adele’s parents have taken advantage of ‘Compound Interest’. Albert Einstein said that compound interest is the ‘eighth wonder of the world’. Compound interest is the reason that the rich always seem to get richer.
Compounding your interest is the simple act of earning interest on your interest. Here’s an example. Over one year I earn 10% on my $100 investment giving me $110. Rather than taking the $10 out and spending it, I leave it invested and earn another 10% the next year. I now have $121. So, in year one I earned $10, in year two I earned $11, this will continue to grow as long as I leave my investment in place.
Let’s get back to Adele. Her parents stand up after dinner and give a quick speech as to how proud they are of their daughter and they hand her the details of her investment which is worth $64,814. That’s right, their $25,200 has turned into $64,814, more than double.
What a great way for Adele to begin her adult life.
Let’s remember that this is based on $100 per month. What if they had been able to contribute $200pm?
Total investment: $50,400
Balance after 21 years: $129,628
Total investment: $126,000
Balance after 21 years: $324,071
You can play around with the figures on the MoneySmart compound interest calculator.
You will find it here
You can change the initial amount, monthly amount and interest rate to see what outcomes you can achieve. However, you look at it, it’s a great gift to give.
Why not think about this for Christmas? It could be a gift you give yourself.
Want more info on kids and money? Have a look back at Smart.Happy.Money 7 '3 ways to teach your kids about money'
Have a great day and as we move into the Christmas period remember to stay healthy, happy and safe.
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Ben Graham-Nellor is an advisor, coach, blogger and speaker who has worked in the financial services industry for over 15 years.
BGN Financial Management Pty Ltd is a Corporate Authorised Representative 468796 of Professional Investment Services Pty Ltd AFSL 234951 ABN 11 074 608 558 www.centrepointalliance.com.au
The information in this communication has been prepared on a general advice basis only. The advice has been prepared without taking account of your specific objectives, financial situation or needs. Accordingly, you should, before acting on the advice, consider the appropriateness of the advice having regard to your objectives, financial situation and needs. In cases where the advice relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure Statement (or other relevant information statement) and consider such document before you make any decision about whether or not to acquire the product. For these reasons, it is imperative that you seek advice from your financial adviser before making any investment decisions.